Why are risk models and simulations used and what benefit do they provide to the management of project risks?
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INFO 580
Project Risk Analysis &
Management
Module 5a: Quantitative Risk Analysis – More
Tools and Techniques
Quantitative Tools & Techniques
• EMV (Expected Monetary Value)
• Three Point Estimate
• PERT Estimate
• Force Field Analysis
• Fault Tree Analysis
• Scenario Analysis
Proprietary and Confidential
Quantitative Tools & Techniques
– EMV
• EMV (Expected Monetary Value)
▪ EMV = Probability x Impact
▪ Can be positive (+\$) or negative (-\$)
Examples:
• Positive (Opportunity/ Benefit)
▪ 40% likelihood of a \$50,000 profit (from the new marketing campaign)
▪ EMV = 0.4 x \$50,000= +\$20,000
• Negative (Threat/ Loss)
▪ 70% likelihood of a \$25,000 loss (from hurricane damage)
▪ EMV = 0.7 x -\$25,000= -\$17,500
Proprietary and Confidential
INFO 580
Project Risk Analysis &
Management
Module 5b: Quantitative Risk Analysis – Three
Point Estimates
Quantitative Tools & Techniques
– 3 Point Estimate
• 3 Point Estimate
▪ Optimist (O); Most Likely (ML); Pessimistic (P)
▪ 3 Pt. Est.= (O + ML + P)/ 3
Example:
• How long with Task A take to complete?
• O= 3 days; ML= 4 days; P= 8 days
• 3 Pt. Est.= (3 + 4 + 8)/ 3= 15/ 3= 5 days
Proprietary and Confidential
Quantitative Tools & Techniques PERT Estimate
• PERT (Program Evaluation and Review Technique) Estimate
▪ A specific type of 3 Point Estimate
▪ Optimist (O); Most Likely (ML); Pessimistic (P)
▪ PERT Est.= (O + (4xML) + P)/ 6
Example:
• How long will Task A take to complete?
• O= 3 days; ML= 4 days; P= 8 days
• PERT Est.= (3 + (4×4) + 8)/ 6= (3+16+8)/ 6= 27/ 6= 4.5 days
Proprietary and Confidential
INFO 580
Project Risk Analysis &
Management
Module 5c: Quantitative Risk Analysis – Force
Field Analysis
Quantitative Tools & Techniques Force Field Analysis
Details:
▪ Driving Forces (Positive)
▪ Restraining Forces (Negative)
▪ Denotes the strength of each force
▪ Used to determine the effect project uncertainties
(risks) will have on project objectives
Proprietary and Confidential
Force Field Analysis
Force Field Analysis
Implementation of Enterprise Resource Planning Application
(Force Strength)
Driving Force
(Positive)
+5
+4
+3
+2
+1
0
-1
-2
-3
-4
-5
Restraining Force
(Negative)
C-Level support
General inertia, esp. at middle
management
Shareholder support, w ith the
projected revennue
Cost of ERP is high; concern w ith
project budget
Greater Board engagement, esp.
more timely report and decision
making
Skepticism w ith past
management
initiatives
can create synergy
integration of systems is
challenging
Enable an integrated evaluation
of critical company resources
More fear of change as middle /
low er management may lose
control over their resources
Proprietary and Confidential
INFO 580
Project Risk Analysis &
Management
Module 5d: Quantitative Risk Analysis
Quantitative Tools & Techniques Fault Tree Analysis
• Fault Tree Analysis (FTA):
▪ Deductive failure analysis of potential project
failures (risks)
▪ The threat risk (failure) is detailed at the top of the
diagram
▪ Uses Boolean logic [algebra where values may
either be true or false]
Proprietary and Confidential
Space Shuttle
Challenger Explosion:
O-Ring Analysis
Fault Tree Analysis
Proprietary and Confidential
Quantitative Tools & Techniques –
Scenario Analysis
• Defined:
▪ Evaluate risks give a plan of action, based on different scenarios/ conditions
that could take place as the plan progresses.
▪ Use dollars or days to measure the impact of each scenario
▪ Not dependent on past results, so it may reveal black swans…
o Just because we haven’t see an event occur in the past, doesn’t mean it won’t
occur in the future.
▪ A way to think about the future in a structured manner
▪ Provide a reasonable number of possible scenarios without being excessive
(consider the law of diminishing returns)
▪ Both short-term and long-term time frames for scenarios can be evaluated.
Salleh, S. (6/28/13) Risk and Uncertainty Blog- Estimating Risk: the importance of Scenario Analysis. Lumina Decision Sys
Proprietary and Confidential
INFO 580
Project Risk Analysis &
Management
Module 5e: Quantitative Risk Analysis Decision Tree Example
Quantitative Methods – Decision
Tree Analysis Review
Decision Tree Analysis
• Used for selection of alternatives
• Paths are shown using branches in
the decision tree
• The EMV (expected monetary value)
of each branch is used to determine Decision
the optimal path (best selection)
Point
while considering uncertainties
▪ (This will be discussed in detail next
week.)
• May be used for threats and/ or
opportunities
Point
Point
Proprietary and Confidential
Result
Point
Result
Point
Result
Point
Result
Point
Quantitative Tools & Techniques –
EMV Review
• EMV (Expected Monetary Value)
▪ EMV = Probability x Impact
▪ Can be positive (+\$) or negative (-\$)
Examples:
• Positive (Opportunity/ Benefit)
▪ 40% likelihood of a \$50,000 profit (from the new marketing campaign)
▪ EMV = 0.4 x \$50,000= +\$20,000
• Negative (Threat/ Loss)
▪ 70% likelihood of a \$25,000 loss (from hurricane damage)
▪ EMV = 0.7 x -\$25,000= -\$17,500
Proprietary and Confidential
Quantitative Tools & TechniquesDecision Tree
Example Decision Tree Analysis:
• Decision Point= Make or Buy Decision
▪ For Make Product:
o Profit: 80% of \$57,000
o Loss: 20% of \$25,000
Make
Product
Decision
Profit: 80%
of \$57,000
Loss: 20%
of \$25,000
Profit: 95%
of \$40,000
Loss: 5% of
\$35,000
o Profit: 95% of \$40,000
o Loss: 5% of \$35,000
Proprietary and Confidential
Quantitative Tools & TechniquesDecision Tree
Example Decision Tree Analysis:
• EMV for Make Product:
▪ Profit: 0.8 x \$57,000= \$45,600
▪ Loss: 0.2 x -\$25,000= -\$5,000
▪ Total EMV(Make)= \$ 40,600
Largest positive
value
▪ Profit: 0.95 x \$40,000= \$38,000
▪ Loss: 0.5 x -\$35,000= -\$17,500
Proprietary and Confidential
INFO 580
Project Risk Analysis &
Management
Module 5f: Quantitative Risk Analysis Summary
Quantitative Tools & Techniques
While the qualitative analysis will provide us an assessment of the impact and
prioritization of individual risks:
• The joint effect of these risks needs to be assessed
• The monetary or schedule impact(s) (dollars or days) need to be assessed.
Tools and Techniques of Quantitative Risk Analysis:
• Expert Judgment
• Data Gathering
• Interpersonal & Team Skills
• Representations of Uncertainty
• Data Analysis
Proprietary and Confidential
Quantitative Analysis
Tools/techniques include:
• EMV (Expected Monetary Value)
▪ EMV = Probability x Impact
▪ Can be positive or negative
• 3 Point Estimates
• Simulation: Monte Carlo Analysis & Latin Hypercube
• Force Field Analysis
• Fault Tree Analysis
• Scenario Analysis